How two lawsuits could destroy Uber and Lyft's business models — and set a precedent for the rest of the sharing economy

Demonstrators hold signs
during a protest organized by the San Francisco Taxi Workers
Alliance against ridesharing services Uber and Lyft outside the
8th Annual Crunchies Awards in San Francisco, California February
5, 2015.REUTERS/Stephen
Lam

Now, US District judges Vince
Chhabria and Edward Chen say juries will decide how Uber and Lyft
drivers should be classified.

A ruling in favor of the
drivers "could significantly raise their costs
beyond the lawsuits and force the companies to pay social
security, workers' compensation, and unemployment insurance,"
Reuters reports.

Generally, drivers and other independent
contractors want full-time pay — or at least predictable pay —
but employers have their sights set on maximizing profits.

Employees are expensive for companies. According
to the IRS, for common-law employees, employers "must
withhold income taxes, withhold and pay Social Security and
Medicare taxes, and pay unemployment tax on wages paid" to
full-time employees. The same is not necessarily true for an
independent contractor.

Benefits are another aspect often extended to employees but not
independent contractors. And employers but not independent
contractors have the right to control how a worker behaves — how
to dress, for example, or specific customer-interaction
protocol. You have more labor protections when you're an
employee.

From a company mindset, it's easy to see why a fast-growing
company like Uber would favor independent contractors.

But hiring laborers as employees not only makes them happy — it
gives company more control over their employees. Companies can
enforce a dress code or uniform, for example, with employees, or
they can dictate on-duty behavior. In a 2013 lawsuit,
a judge ruled that FedEx had misclassified
its delivery drivers as contractors when they were really
employees, saying that it's "beyond cavil that the pickup and
delivery drivers are essential to FedEx's business."

Shannon Liss-Riordan,
the same attorney
who served on behalf of the 11 FedEx drivers who filed the
lawsuit in 2013, is the attorney for the lawsuits drivers have
filed against Lyft and Uber.

As independent contractors for
Lyft and Uber, drivers pay all their expenses out of pocket: gas,
maintenance, insurance, and detailing, just to name a
few.

The drivers, should they win these lawsuits, could be entitled to
either hourly wages or a regular salary, as well as reimbursement
for the money they've spent on things like gas and insurance as
drivers for Uber and Lyft.

Lyft has argued that because drivers are in control of how often
they work, they are independent contractors. Drivers have
contested this classification. They see themselves as employees
because they are told how to behave with customers and can be
deactivated without notice from Lyft's system.

"Uber's whole business model is
built around having other people take the risks as independent
contractors. And I don't know if they can change that; it's built
into their business model. It's how they're making so much
money," Joseph De Wolf Sandoval, an organizer for the California
App-Based Drivers Association (CADA)
told Business Insider back in October.

The lawsuits, which are both
seeking class-action status in San Francisco Federal Court, would
apply to drivers only in California. But a ruling in favor of the
drivers would set a precedent for Uber and Lyft, as well as other
companies that follow the independent-contractor business
model.

Here's why.

There has been a rise in on-demand startups recently. You may
have heard it called the "1099 economy," so named for the 1099
MISC forms that employers fill out when they hire contractors, as
opposed to the W2 forms companies fill out when they hire
full-time employees.

Uber and Lyft are chief among these on-demand companies, of
course, but there are many others. Postmates, Wunwun, and
TaskRabbit are delivery services. Washio and FlyCleaners do your
laundry on demand. Handy and MyClean are home cleaning startups.
The
"Uber for X" category goes on, and it's seemingly endless.

The people who work for these
companies — not the executives, but the people who do the dirty
work of delivering your laundry and
dropping off your bag of potato chips — are not usually
employees — they're contractors.

Startups use contractors for
the simple reason that they are a lot cheaper than employees.
When you're an independent contractor, your employer does not
have to consider paying into Social Security or withholding
taxes. It saves them money.

When home-cleaning
startup MyClean switched from an independent-contractor model to
one with full-time employees, the startup saw its labor costs go
up 40%, according to Kevin Roose, writing
for New York magazine.

From a financial perspective,
it makes sense why companies are clinging to the
independent-contractor model. But drivers have a lot to gain from
rulings in their favor. These drivers are only asking for
reimbursement for their expenses.

But if juries rule against Uber
and Lyft, drivers stand to gain more than just lost wages. These
lawsuits could change Uber and Lyft's business models entirely,
increasing their labor costs.

We reached out to Lyft and Uber
for comment and will update this post when we hear back.